Fewer active managers beat index funds last year: Morningstar
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A smaller share of actively managed mutual funds and exchange-traded funds outperformed their index-based counterparts in 2025 compared to the previous year, according to new research. Still, financial advisors say both types of investments can be included in your portfolio.
“I don’t treat them as passive and active. [funds] “I treat them like teammates,” said certified financial planner Mike Casey, founder and president of AE Advisors in Alexandria, Virginia.
Active and passive fund performance
According to Morningstar’s report, 38 percent of active funds run by professional investment managers outperformed their passive counterparts in 2025 after accounting for fees; this rate was 42 percent in 2024. six months Active/Passive Baromoter. The performance of 9,248 funds was evaluated in the analysis.
While it’s not uncommon for active funds to miss the mark (research shows only 21% of them survive and excel in the 10 years ending in 2025), it does show that there are shifts in which investment categories either outperform or fall short.
For example, among diversified emerging markets funds, 64% outperform their passive counterparts, Morningstar finds; This rate is an increase of 42 points from 22% in 2024. By contrast, among actively managed real estate funds, it was only 12% ahead, down 54 points from 66% in 2024, according to the report.
40% of active bond funds in the study outperformed their passive counterparts. However, this rate is lower than 64% in 2024. However, they have a 42% success rate within 10 years; This puts it ahead of all categories tracked in the report.
While it’s impossible to predict how stocks and bonds will perform this year or how a particular sector will perform, many financial advisors say there are segments of the market where passive, index-based investing makes more sense and other areas that are more suitable with active management.
How to use active and passive funds?
Many advisors use passive funds to keep underlying costs low and add active strategies in risk management, diversification or areas where investment selection can increase risk-adjusted returns. Passive funds track an index, meaning their performance often mimics, for better or worse, the performance of the underlying indices.
Passive funds “shine when markets are highly efficient and costs are most important,” Casey said.
Fees matter because even small differences add up to decades of investment.
For example: An investor starting with $100,000 and earning 4% per year will have approximately $208,000 after 20 years with a 0.25% fee, compared to $179,000 with a 1% fee. Securities and Exchange Commission. That’s a difference of $29,000.
“I don’t treat them as passive and active. [funds] as rivals. I treat them like teammates.
mike casey
Founder and President of AE Advisors
At the end of 2025, passive ETFs had an average expense ratio (expressed as a percentage of assets) of 0.135%, while passive mutual funds had an average expense ratio of 0.058%, according to Morningstar. This works out to 0.42% for active ETFs and 0.57% for active mutual funds.
“Low wages have been of paramount importance for decades,” said Patrick Huey, CFP, owner and general counsel at Victory Independent Planning in Naples, Florida.
The Morningstar report also found that over the 10 years to 2025, nearly a third (31%) of active funds in the cheapest quintile of their category outperformed their average passive counterparts, compared with 17% for the most expensive funds.
Active funds can earn their higher fees in less productive corners of the investment world “where talented managers can add real alpha,” Casey said. Alpha is the return above the return of the indicator.
Consider the retirement factor
Passive funds are ideal for a variety of scenarios, including core market exposures, Huey said. This includes U.S. and global stocks, as well as investment-grade bonds, he said.
For retirement savers in their 30s or 40s, “you can build most of the portfolio from passive funds and be very well off,” he said.
But that changes as he gets older, he said.
“The closer you get to retirement, the more it starts to matter because you can’t accept the volatility of the overall index,” Huey said. “The risk profile changes when you start making withdrawals.”
That’s when active management may be worth the higher fee, Huey said. “Active bond and stock managers can shorten the duration [of bonds]”Raise funds or turn to defense when circumstances warrant,” he said.
